4 Rat Holes

America is committing financial suicide by pouring money down numerous rat holes.  Before examining four of these destructive money pits, let's look at a chart from Tom Osenton's book, The Death of Demand.  Osenton, as a marketer, recognized that there is a limit to consumer demand, a saturation point.  I believe this saturation point is determined by the excess cheap energy available to an individual or society, which determines ability to buy.

In the below chart, look at the US GDP  by decade.
NOTE:  click any image that follows for a sharper image.
Notice how GDP annual growth rate has dropped from about 4.5% in the 1960s to roughly 2% by 2000.  Osenton wrote his book in 2004, so he didn't have the benefit of seeing the subsequent collapse in demand.  But he predicted it.  I believe GDP has been increasingly exaggerated in the last 20 years due to several instances of changing the methodology of measurement.  I think gross GDP is overstated by about 1%, and inflation is understated by about 1%, which means a stated net GDP of 2% is more likely 0%.  John Williams of shadowstats.com calculates the difference as being much bigger, as shown in the graph on this page.

It is axiomatic that long term corporate revenues should grow at about the same rate as the general economy as measured by GDP.  If corporate profits are soaring (as they currently are) while GDP is not, you must investigate why this is the case.  Otherwise you will entirely miss the mechanics of the looting of America.
The 4 Rat Holes
  1. Large Financial Institutions;
  2. Housing;
  3. Automobile Manufacturers; and,
  4. The US Military.
1. Large Financial Institutions
We are all familiar with the fact that the international Banksters have gambled huge amounts of money, lost much of it, and then were bailed out by taxpayers all over the world.

But people are still gullible enough to believe that those entities are needed.  They aren't.  They subtract economic value and should be eliminated; they are sucking the life out of the economy.  The smaller regional and community banks can do most of what the big ones do, and what they can't do isn't a necessary part of the financial system.  Recent legislation on financial regulation was superficial and did little to diminish the power of the Banksters.

Think of a bank as an auction mart.  Some people have things to sell, some want to buy.  The auctioneer is an intermediary and takes a profit from bringing buyer and seller together at an agreeable price.  Banks should be a small part of the economy because basically all they do is offer services for a fee like a barber.  It is important to understand that the financial sector creates no wealth.  The financial sector merely redistributes existing wealth.  The same can be said of lawyers, accountants, casinos, and many other professions and enterprises.

In recent years the financial sector has been redistributing huge amounts of wealth not from one wealth producer to another, but to themselves.  No economy can survive long term with a parasite this large.

Here's a chart that shows the trend in wealth being stolen by the Banksters (left click for sharper image).
The above graph appeared in Simon Johnson's excellent article showing the power of the financial institutions in our society.

What is tragic is that trillions of dollars have been poured into the financial sector rat hole, and as long as they continue to drain the profits from the economy there cannot be any economic recovery.

2. Housing
Americans are finally learning that a house is not an investment -- it is a depreciating asset like a car.  Leave it unattended and over time the price will drop to zero and lower (may have to pay to have it demolished).  Canadians haven't learned that lesson yet, but they are about to.  This isn't to deny that a house won't hold its value relative to inflation over time, provided it is maintained (at a cost of 1-2% of value per year).  In any location with a sound economy that will be the case, but where there is a deteriorating economy house prices will drop.  

Long term, the economies will continue to deteriorate in America and Canada.  Draw your own conclusions about house prices.

Let's examine some housing trends.  First, here is a graphic showing the average size of new homes in America over time.

How does American house size compare to that in other countries?

Note the above chart is in square footage per capita which is a function of both house size and number of occupants. Note also in this mix only two countries have per capita square footage over 500, Denmark and USA.  Canada doesn't appear in this chart, like many other American analyses, because the word hasn't gotten out yet that we are America's largest trading partner and the nation that supplies more oil to America than any other.  The advantage of living next to America is like living on one side of a one-way mirror; we can see them but all they see is their own reflection and often are blissfully unaware of our existance.

Speaking of number of occupants, is there any trend there?  Yes, indeed.  Here's one article that outlines the trend to fewer occupants per house.  And here's another.  Note that the last article states there were 3.1 persons per household in 1970 and 2.6 in 2007.

Let's have some fun with numbers.  If the average house size in 1970 was 1500 square feet (graphic above), and the number of occupants was 3.1, then there were about 484 square feet per occupant.  If we do the same calculation using 2004 house size of 2349 square feet, and 2007 occupancy of 2.6, then that indicates about 903 square feet per occupant, an increase of 87% over the 484 number from 1970.

In the 1960s in the small town where I grew up there were many families with 4 or 5 kids living in 800-1,000 square foot houses.  I was in one of those families with a small house and 5 kids.  It gave us the incentive to get out and provide for ourselves.  But I don't recall ever feeling deprived, harmed, or held back in any way just because we didn't have a bigger house.

Now think about the implications of these trends.  From 1970 to the recent past Americans have bought 87% more house per capita.  And in 1970 there were only 3.1 people in a 1500 square foot home.  What if people decided to share housing more, and go back to the 1970 standard of 484 square feet per person?  What would that mean in terms of houses needed?  Simple math determines that Americans would need only 53.5% of the houses in existance.  Do you think people might share accommodations more as their finances deteriorate?  This is the basis for my oft-repeated statements to my kids to be careful about buying houses -- in North America we have at least twice as much housing as we need.

For those who hold the misconception that housing is a good investment (i.e. provides a return significantly above the risk-free return of T-Bills for instance), below is a graph from a study done by Robert Shiller, appearing in his excellent book Irrational Exuberance.  Note Shiller's chart below has an addition to indicate where American prices should go to get back to historical norms.  Hint -- it's not up.  And with Canadian house prices roughly twice American ones, what do you think might possibly happen to prices here? (Left click on chart to see it in higher definition.  Enlarge by holding down Ctrl key and hitting + key.)

A ten year-old child could draw the red dotted line above, if asked where the line should go if it went to a level where it was at most of the time.  But if the line goes there that would result in yet more massive amounts of underwater mortgages and foreclosures.  (I won't even get into the numbers here because they are available anywhere, everywhere.)  And that would collapse the Banksters who are holding mortgage backed securities at prices far above their market value.  It would also collapse Fannie Mae and Freddie Mac, two supposedly private institutions that are bankrupt, and will have to be bailed by the taxpayers to the tune of hundreds of billions of dollars in any event.  (They are rough equivalents of Canada's government-owned CMHC which will also need a public bailout after young over-leveraged Canadians go bankrupt in droves.)  And it would significantly downgrade the $1.25 trillion in mortgages that the Federal Reserve took onto its balance sheet last year.

How does Canada compare?  Here's a chart from one blogger who indicates the pullback in Canadian house prices could be much less than in the USA, but over several years.  This seems to be the prevailing view of many people whose analyses I respect, and would be consistent with previous housing price slumps.  I may be overly pessimistic on Canadian house prices.  But remember Vancouver is the world's most unaffordable city for housing, according to the last Demographia survey (fall, 2009) with Victoria in #8 spot.  Other Canadian cities in the 100 most unaffordable cities worldwide are Abbotsford, Kelowna, and Toronto.  On the other hand Thunder Bay, Windsor, Moncton, Saguenay and St. John made the list of the 100 most affordable house prices worldwide; the other 95 on the list are all American cities, with Detroit having the most affordable housing in the cities surveyed.  So it's a mixed bag. 

It should be kept in mind that when a trend overshoots significantly, it doesn't just go back to the "normal range" (reversion to the mean).  Most of the time, particularly with financial data or animal population dynamics, the trend overshoots the "normal range" to the downside before settling in the "normal range".

This is one of the hard facts of life that the US Federal Reserve Bank, the US Treasury, and the most useless legislative body on the face of the earth (US Congress) are trying to deny.  They are doing everything in their power to halt the inevitable collapse in house prices.  And they are wasting hundreds of billions of dollars in taxpayer money in that vain attempt.  The latest trial balloon rumour is that The Powers That Be (TPTB) are considering a refinance scheme where mortgages held by Fannie Mae and Freddie Mac could be revised to a 4.5% (or even 4% rate) for a 30 year mortgage.  I can't even begin to describe the numerous ways this is a stupid idea, but it shows how desperate TPTB are getting.

Just more money down another rat hole.

BTW, a housing subsidy like mortgage interest deductibility is just one of the discriminatory, wealth siphoning devices at work.  It not only enhances the wealthier, home "owners" relative to renters, but it enhances the white population relative to the minority groups who tend to be more renters than owners.  That is a form of systemic discrimination.  See graphic below.

And for a bit of housing humour, one blogger noticed that as house sizes increased, so did the size of Americans as indicated by the obesity index (or vice versa).  So, he wondered, do fat people create large houses, or do large houses create fat people?  We all know that carp will grow to fit the size of the pool they are raised in -- are humans similar? (Click for sharper image.)
And of course for the two almost Ph.D.s in the family I do realize correlation does not imply causation, but I'm having too much fun with those who don't understand that.

3. Automobile Manufacturers
I am one of the people who believe GM and Chrysler should not have been bailed out.  They are incompetent companies in an industry with huge over-capacity, and will be back for more bailouts.  They gambled and lost.  They built large gas guzzlers for the bigger profit margins and neglected the more fuel efficient models.  And GM in particular was really a finance company that happened to make vehicles as a sideline.  

I find it hilarious that a gullible public believe that the Chevy Volt will bring GM back to profitability, and that car will also be their salvation to low cost motoring, while also moving America towards energy independence.  This is truly rainbows, unicorns, and pixie dust stuff.  That's the kind of disinformation that President O'Bomber has been peddling lately.  He's as clueless on the economics of transportation as he is on everything else economic.  He's the same guy who stated America will outgrow its debt by doubling its exports in five years -- a virtual impossibility!  Of course he lost my support long before that when he hired two incompetent Bankster shills, Tim Geithner and Lawrence Summers into key economic positions.

To get a more balanced view on electric cars, you should read this recent Slate article.  I always find it a good policy to ignore mass media news coverage of anything technical, and go to a source knowledgeable in the topic matter, such as this report on electric car batteries linked in the Slate article.  If you do a little research you will quickly conclude that in 10 years electric cars will still be a very small portion of total vehicles sold, and will likely still be uneconomic for purchasers unless subsidized by government which O'Bomber is doing. 

There is considerable "greenwashing" going on by proponents of electric cars.  By driving an electric car you are switching your fuel from gasoline to about half coal and half natural gas (the two biggest sources of electrical power).   The Chevy Volt is a $41,000 car with a $13,000 battery pack installed as well as a small gasoline engine.  And what would a much superior Ford Focus cost?  Hmm.  No wonder the studies show there is no market for this vehicle in the diminishing middle class.  It's something for movie stars and Google engineers to show off their enviro-friendly approach to life.

O'Bomber is funding lithium ion battery manufacturers in the United Subsidies of America because they don't have any.  Why not?  Is there anything in the land of the free and home of the brave that isn't cross-subsidized 19 different ways?  Little wonder American dignitaries are laughed at when they tour the world promoting their brand of "free market" capitalism.  

And the studies show that soon there will be twice as much lithium battery supply as demand, which means inefficient American producers will have to be subsidized to the tune of millions of dollars per job created.  More rat hole money.  But, O'Bomber says, the price will come down.  Of course it will.  It has to because we are in a deflationary credit unwind, and the vehicle is grossly uneconomic with the current price structure.  But other cars will be introduced at lower price as well.  Why wouldn't people consider something like an economical Tata Nano for less than $3,000 for city driving?

Ha! After writing the above, I found the following link -- someone who thinks like me on this topic.  I suspect the Chevy Volt will be roughly equivalent to another Chevrolet product I remember -- the Vega, just another over-hyped piece of junk!  Remember George Bush and Arnold Schwarzenegger hyping (and subsidizing) the hydrogen fuel cell car just a few years back as the transportation solution of the future? O'Bomber discarded that concept  as unrealistic and switched funding to the lithium ion electric car concept.  Government fads and subsidies are changed more often than my underwear.

Now that I got some of the detailed things off my chest, let's look at some big picture info.  Here's a graph of the trend of American vehicles per capita and vehicle miles driven from 1950 through 2007.

Note the trend upward in Vehicles per Capita and Vehicle-Miles per Capita as Americans felt increasingly more wealthy.  What if Americans felt less wealthy and decided to drive less?  Could the uptrend be broken and return to a lower level?  There are a few clues in the graphic below.  Notice how recent sales are back to early 1980s levels.  But they'll rebound, right?  Maybe, but how much?  And is it possible after a rebound sales could drop off again to even lower levels?  Stay tuned.  

Below is a more recent chart, showing sales for the years 2006 through mid-2010.  Notice the artificial spike in sales created by the "Cash for Clunkers" promotion in 2009 (yet more tax dollars down a rat hole).

I tell people (as they stare at me as though I need to be institutionalized with heavy sedation and psychiatric help at all times) that 2006-2007 was probably the highest gasoline consumption America will ever see, and also had the most cars on the road that we will ever see.  People will car pool more to ease expenses, and cut back on unnecessary driving.  Many fewer cars will be needed, perhaps half as many, just like houses.  Teenagers had better choose their parents carefully, because middle class parents will not be able to spring for a car for a teenager -- they will be struggling to finance a single family vehicle (less so if they get something like a Tata Nano).

And yet all across America they are still planning on building more freeways, airports, etc., despite the overwhelming evidence that there will be neither the funds nor the need for such frivolity.  In the future there will be fewer vehicles on the road, fewer planes in the sky, and speed limits will be reduced to conserve fuel.  There will be more bicycle lanes in the cities.  Many paved roads will revert to gravel surface.

It seems inevitable that there will be many more plant closings in the North American auto sector.  Yet Canadians and Americans seem determined to pour funds into failed manufacturers, to "save the jobs and local economies".  Take a good look at Detroit, folks.  That's the future of the losers in the car manufacturing game.  

When you subsidize GM or Chrysler or a new lithium battery manufacturer you are just pouring taxpayer money down rat holes.  They are uneconomic for many reasons, not just temporarily, but permanently.

4. The American Military
How can this immense bureaucracy with its corruption and incompetence not be higher on the list?  It possibly should have been #3 instead of Automotive.

Where to start?  Let's look at a graph of military spending around the world.

Let's look at a graph of American military spending alone.

If I recall correctly Commander-in-Chief O'Bomber increased the American military budget by 6% last year.  Must be to cover that $400/gallon gasoline that they're burning in Afghanistan hunting down the 50-100 Al Qaeda who are there. That's what it costs to fight a war in far off places.  Of course the military assure us there are literally hundreds of Al Qaeda in Pakistan, so they will need much more money to get them.  But there are also thousands of Taliban insurgents who are unhappy with the infidel invaders, and as a result, tend to kill or injure them whenever possible.  

Afghanistan is where arrogant empires go to learn humility, just prior to losing empire status.

The hunt for terrorists was never really a serious one.  That became apparent early in the Afghanistan invasion when Bin Laden was in the Tora Bora area with his small band of Al Qaeda.  The American commanders in Afghanistan requested 600 Rangers so they could seal off the escape routes to Pakistan, and then gradually tighten the noose until they had killed or captured all the Al Qaeda and insurgent Taliban.  They were refused.  That's when I knew the invasion of Afghanistan was about something else.  The Americans built permanent bases, just like in Iraq and many other countries; they have no intention of leaving, just pulling troops off the street policing duties.  The clandestine search and destroy missions will still go on, but the overt military actions will be wound down.

The war in Afghanistan isn't going nearly as well as portrayed in the mass media.  If you read the relevant blogs regularly you find a picture of waste, incompetence, corruption, and slaughter of innocents -- just like most wars.  Photo sites like this one give a small insight into the reality of a war theatre.  Canada's Prime Minister is a control freak and his administration has manipulated almost all media releases of any significance.  Most attacks on Canadian troops in Afghanistan are not reported because the media are directed not to report them.  Quite frankly, NATO is taking a royal butt kicking in Afghanistan and everyone seems to know it except the public in North America, who somehow think we are "winning the war on terror".

Here's an example of incompetence where Blackwater pilots splat a plane into a box canyon, killing 6, because they had no clue of where they were going and were more interested in what music they wanted to play.  

Gee, do you think there could be a little corruption here where Afghanis are buying villas in Dubai?

And perhaps here as well, where so much reconstruction money for Iraq is not accounted for.  Well, it's only 96% not accounted for, not like it's all missing.

Here's an animated graphic of IED explosions in Afghanistan.  Green dots are no injury, yellow are injuries, red are deaths.  The table with yellow numbers has NATO & civilians on the left and insurgents on the right.  

The most interesting thing about American military involvement in Iraq and Afghanistan is that the majority of the world are secretly in favour.  They won't say this publicly, but if the American military is tied up there, then there is less chance of them invading some other nation.  And most nations want to see a weaker America.  The militant Islamists are overjoyed.  Targets delivered to their own back yards; kill an infidel and never leave the farm.

China and Russia are tickled pink.  Particularly Russia who was driven out of Afghanistan primarily due to American aid to the Afghan "freedom fighters" (now called terrorists or insurgents).  The handheld surface to air missiles were particularly effective in knocking down Russian helicopters; so far Russia hasn't returned the favour by arming the Taliban with such weapons.

After the USSR disintegrated there was agreement that NATO would not expand eastward.  But America convinced a naive Poland to host American missiles, right on Russia's doorstep so to speak.  And America worked on producing "colour revolutions" in many of the USSR break-away countries, so they could set up military bases there.  Georgia is a good example with its American puppet government, American and Israeli troops using Georgia as a military base from which they could easily attack Iran.  So Russia is a little PO'd about the whole American military expansion and would like to see them bleed out more in the mideast.

The same goes for China.  The day will come when China and America square off, and China prefers America to be much weaker militarily when that day comes.  So every day America spends bleeding out its economy brings China closer to being able to take on an American military challenge.  China doesn't need to win the battles; they just need to win the war as the Viet Cong did.  One of their generals stated they would declare full out nuclear war if America interfered with Taiwan or attacked China in any way, and that was in 2005.  They're five years stronger now, and America is five years weaker.  But the Chinese are patient; their best strategy is to wait for America to destroy itself from within.  Remember where Sun Tzu came from.

Sadly, Americans don't realize that much of what their military does is indiscriminantly throw taxpayer money down a rat hole, and create enemies in the process. 


It's silly season in Washington (when isn't it?) as everyone is preparing for the November mid-term elections.  The minute the results are in, then the parties will begin strategizing for the 2012 elections, including the Presidential election.

Don't expect America to do anything logical or substantial to improve its financial standing before November, and probably very little thereafter.  No American politician is likely to tell the populace the truth as the recently elected Prime Minister of Great Britain has.  America is not paying its way in the world and is headed for massive default.  To avoid this, taxes must rise (on almost everything, everywhere) and government spending must be cut back.  

Americans will either make the decisions themselves, or austerity will be imposed by external forces.  This will be very painful for Americans to accept and the tendency will be to look for someone to blame.  So far it's been mostly political factions blaming each other, with copious amounts of blame directed at China.  But when economic conditions worsen there is always a tendency to go to war (more war in this case).

At some point the bond vigilantes will step in and force America to slow down on debt issuance.  But I think that the commodity vigilantes are more important and more effective.  If America refuses to enact fiscal and monetary responsibility the world outside America will bid up the price of commodities quoted in American dollars.  Every time those prices rise the American economy will get knocked flatter than pee on a plate.  See my previous post, It's all about Energy.

There is one thing I am certain on.  If America doesn't stop throwing money down the four rat holes discussed above, there is zero chance of their economy improving.

1 comment:

  1. really enjoyed this post and mostly agree. will try and remember the link to an excellent economics site which demonstrated that in 10 years, US social security commitments and military expenditure will be totally unsustainable.

    in the meantime, here in oz we are always slow to get the latest movies - you may already have seen it - i am looking forward to it: